And once again, we are back with Mary Jo Dolson, of the tax and accounting firm of Skoda Minotti. We are talking “SALT” or State And Income Taxes. We looked at the most basic of definitions and then dug into the idea of a Nexus, i.e., how do you show you might have liability for a tax in a state.
Now Mary Jo has promised a quick review of a few relevant laws/terms and then, at long last, we’re going to dig into the impact of “WayFair” on our industry. Hang on folks, this is important!
Okay, what’s the last few foundational terms or concepts that we need to establish? First, why are we really even talking about this? What’s changed?
Mary Jo: The change would be “Wayfair” which you just mentioned. That is shorthand for the 2018 Supreme Court ruling in “Wayfair vs. South Dakota.” It has led to a dramatic changes in how states are approaching this new potential revenue stream. We’ll talk a lot about this in detail later, okay? There are a few more terms left.
Got it! What’s the last bit we need to know? I really hope folks are still with us!
Mary Jo: I know most people just wince when they consider tax law, but I find it fascinating. So here’s what you need to know:
- Public Law 86-272 – is federal law adopted to protect businesses operating in state that are only soliciting sales for tangible personal property. Public Law 86-272 only applies to state income tax and is not applicable to sales tax. Public Law also only applies to the solicitation of tangible personal property – so if your company is providing a service in a state there is no public law protection. If a taxpayer’s activity in a state is soliciting sales of tangible personal property, Public Law 86-272 prevents a state from requiring a taxpayer to comply with the state’s state income tax law. A taxpayer might be subject to a minimum fee if imposed by the state. If a taxpayer is performing additional activities besides solicitation, Public law protection might be voided and this will be discussed in more detail in a future blog.
To give a specific example for the flooring industry – personal tangible property would be flooring for a residential home sold to a consumer. Providing a service would be installing that floor. This means that if you have payroll in place for sales people, they could be protected, but if they are inspecting homes or installing floors, that might be a service that would eliminate that protection.
- Apportionment – state income tax returns begin with federal taxable income plus or minus state adjustments (I will addressed in a future blog). After these adjustments you apply an apportionment factor to determine state taxable income. The apportionment factor is generally made up of property, payroll and/or sales in state to property, payroll and/or sales everywhere. There are variances to the apportionment factor – some states will utilize all three factors and many states are moving to a sales only factor. If the state does utilize all three factors, often the sales factor might be double or triple weighted. Generally, sales are sitused to a state based on where the goods are shipped if selling tangible personal property but if performing a service it is more difficult to determine situs. There are two methods for determining a sale situs if performing a service and these are discussed below.
Sorry to Interrupt, but what is a “situs?”
Situs – the state where a sale is assigned to.
Thanks! Last ones?
- Cost of Performance Sourcing – is a method for determining what sales are part of the apportionment factor for a particular state when performing a service. The sale under a cost of performance is based on the state where the majority of the work is being performed. If the taxpayer’s business involves services you must determine in what states the work is performed so that you can determine what state the sales should be sitused. For example all work is performed in state A and the customer is located in state B. If both state A and state B were cost of performance states, the sale would be sitused to state A and no sales would be sitused to state B.
As an example, maybe you have a showroom and sales office in New York City. A customer comes in to buy floors for his vacation home in Pennsylvania: your sale and installation of flooring in that summer cabin would potentially impact your tax liability in PA, even if you are a NY company making the actual sale in NY.
- Market Based Sourcing – is another method utilized to situs sales from a service. States are gradually moving their statute to be a market based sourcing method instead of the cost of performance sourcing method. Under the market based method, the sale is sitused to a state based on where the benefit is received for the service being performed. Similar example to the one under cost of performance – all work is performed in state A and the customer is located in state B. If the method for sourcing sales in both states A and B is market based sourcing, the sale would be a sale in state B since the benefit received is state B. Throughout the upcoming blogs more information will be shared about market based sourcing.
An example of market based sourcing would be a design and architectural firm located in New York City designing a Pennsylvania home for a PA resident. Even though the work is all performed in NY, the sale is a PA sale because the benefit of the work was received in PA. The NYC design firm could be liable for PA taxes.
Thank you very much, Mary Jo. I am now terrified to even cross a border, but you’re going to tell us that it’s not at all as bad as it seems, right?
Mary Jo: Take heart, my actual goal is to help you to AVOID tax liability, and to do that, we have to start with how they define it.
Thank you! More to come, folks!
Elizabeth Baldwin is Environmental Compliance Officer for Metropolitan Hardwood Floors. In her 25 plus year career in the wood industry has visited over 70 countries and hundreds of facilities of all sizes and types. She describes herself as a “jack of all wood trades.” Familiar with jungles of all sorts–having camped out along the Amazon and walked the halls of Congress–she blogs for the NWFA on both environmental and regulatory issues for educational and informational purposes only. Her blog is not intended and should not be construed as legal advice. Persons seeking legal advice on compliance with CARB, TSCA, the U.S. Lacey Act or any other law, regulation, or compliance requirement/claim should consult with the regulatory agency directly and/or a qualified legal professional.